Are discounts on cars worth the high rates?

If you are planning to buy a car, you would find yourself in a fix. On the one hand there is the deterrent of high interest rates to contend with, but on the other there are attractive discounts and freebies on offer. | How the rates fare

If you are planning to buy a car, you would find yourself in a fix. On the one hand there is the deterrent of high interest rates to contend with, but on the other there are attractive discounts and freebies on offer.

Since car loans usually come at fixed rates of interest, would you want to fix yourself in a high interest loan to avail the discounts or wait for the rates to cool down and lose out on the freebies?

Slowing sales = discountsFestive season is here again and so are the discounts, as is the norm. However, discounts offered by most car makers are higher than last year.

Slowing sales: The auto industry is in a slowdown phase in terms of sales. The industry’s growth is paltry this year as compared with last year, when it grew by an average of 30%. In May, it grew by just 6.5% year-on-year (y-o-y); in June, the figure was 1.5% y-o-y. In July, car sales fell by 16.0% against the year-ago period. The downward trend continued in August with sales declining by close to 10.0%.

Discounts on offer: Most car makers are offering discounts worth Rs 20,000-40,000 compared with Rs 10,000-20,000 offered last year. The figure includes cash discounts, corporate discounts and freebies such as car accessories and others.

The quantum and nature of discounts varies among car makers. For instance, Volkswagen India is offering a discount up to Rs 40,000 in the form of freebies such as free insurance premium and waiver of annual maintenance charge. It is not offering any cash discount. “We are providing different kinds of packages from which a customer may choose,” said Neeraj Garg, director (sales), Volkswagen.

Car loan rates are up at 12-14% compared with 10-11% a year ago (see table).

However, some banks have tied up with car makers. For instance, SBI and HDFC Bank have lowered their margin requirements for Nano to Rs 15,000.

Which works out better?

Small cars: Let’s take a car worth Rs 3 lakh with a discount of Rs 10,000. So the effective price is Rs 2.9 lakh if you opt for the discount. Banks generally offer loans up to 80% of the price. On a loan of R2.3 lakh (80% of Rs 2.9 lakh) at 13% over five years, the cost of the car would notch up to Rs 3,74,680. Over a three-year tenor for the same amount and same interest rate, the total cost would be Rs 3,39,376.

However, if the rates were to moderate to 10.5% (which was the rate last year) six months later and there were no discounts to avail, the car would come at a price of Rs 3 lakh. Over the same tenor of five years, at 10.5% on an amount of Rs 2.4 lakh, your total cost of the car would come to Rs 3,69,480. Over a three-year tenor, the total cost would be Rs 3,40,800.

This means you stand to gain by Rs 5,200 over five years but lose by Rs 1,424 over three years with lower rates without the discounts compared with the present rates with a discount. However, if the discounts were higher, say Rs 20,000, you would gain if you buy the car now.

Mid segment: Now, let us take a car priced at, say, R7 lakh with a discount of, say, Rs 40,000. So the effective price comes to Rs 6.6 lakh and the loan amount (80%) would be R5.28 lakh. At an interest rate of 13% over five years, the total cost of the car would come to Rs 8,52,780. Over three years, the total cost is Rs 7,72,440.

However, if a loan is taken on 80% of Rs 7 lakh (R5.60 lakh) at 10.5% over five years, the total cost would be Rs 8,62,160. Over three years, the total cost of the car would be Rs 7,95,236.

So you stand to gain by Rs 9,380 over five years, but over three years the gain is substantial at Rs 22,796 if you buy the car now. However, if the discount goes down to, say, Rs 10,000, you lose out over both the tenors in the high interest rates regime with discounts.